What happens when you sue someone who is judgment proof? One solution may be to ask the trial court to amend the judgment to add additional judgment debtors. Now, it may seem unusual to be able to add judgment debtors who were not part of the litigation. The procedure, however, is equitable and is based on the theory that the court isn’t really adding anyone, but simply inserting the correct judgment debtors. This is possible if the additional debtors are the alter egos of original judgment debtor.
To succeed in adding additional judgment debtors, the plaintiff/creditor must persuade the court that the following three conditions are met:
the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding;
there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and
an inequitable result will follow if the acts are treated as those of the entity alone.
In a decision released yesterday, the Second District Court of Appeal held that when a plaintiff can satisfy the first two conditions, it would be inequitable as a matter of law to prevent the plaintiff from collecting by treating the proposed additional debtor as a separate entity. Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, 2013 Cal. App. LEXIS 1058 (Cal. App. 2d Dist. Dec. 31, 2013). The problem with this reasoning is that it will almost always be the case that the creditor is seeking to add judgment debtor(s) precisely because it hasn’t been able to collect from the original judgment debtor(s).
For more on alter ego, see:
Alter Ego – “Easy To State But Difficult To Apply”
What Doth The Alter Ego Doctrine Require Of Thee, But To “Do Justice”?
Alter Ego And The Internal Affairs Doctrine
Got Judgment? It May Not Be Too Late To Add A Judgment Debtor
Alter Ego – It’s Not Just For Corporations
Finally, it is worth noting that the original judgment debtor in this case was a limited partnership, not a corporation.